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SKF India: Still no respite

Nov 3, 2009

Performance summary

Topline declines by 4.1% YoY during the quarter, presumably on account of lower demand from the industrial sector.

Operating profits decline by 19% YoY, higher than the topline, thus causing EBITDA margins to decline by 2.1% YoY to 11% in 3QCY09.

Bottomline declines by 16% YoY, lower than operating profits mainly due to significant rise in other income.

For the nine month period, net profits declines by 43.2%YoY on the back of 11.7% YoY fall in the topline.

(Rs m)

3QCY08

3QCY09

Change

9mCY08

9mCY09

Change

Raw material

1,169

1,045

-10.7%

3,096

3,016

-2.6%

% sales

27.2%

25.3%

24.7%

27.2%

Purchase of traded goods

1,639

1,664

1.5%

4,850

4,246

-12.4%

% sales

38.1%

40.3%

38.7%

38.4%

Employee cost

314

335

6.7%

912

978

7.3%

% sales

7.3%

8.1%

7.3%

8.8%

Other Expenditure

619

628

1,958

1,657

% sales

14.4%

15.2%

6%

15.6%

15.0%

-4%

(* annualised, ** on trailing twelve months earnings)

What has driven performance in 3QCY09?

While the topline declined by 4.1% YoY basis in 3QCY09, the same grew by 9.2% QoQ as the economic revival maintained its momentum during the quarter. It may be noted that around 90% of sales of company are contributed by bearings, which primarily cater to automotive and industrial sectors. Automotive sector, particularly two and three wheelers segment has shown strong signs of recovery during the quarter. Certain industrial segments also witnessed a revival in demand during the quarter.

On the operating front, lower than proportionate decline in the operating cost as compared to topline resulted in a 19% YoY decline in the operating profits. Except for raw material costs, all the costs heads (as a % of sales) showed an increase during the quarter. Operating margins declined from 13.1% in 3QCY08 to 11% in 3QCY09.

Cost break-upů

(Rs m)

3QCY08

3QCY09

Change

9mCY08

9mCY09

Change

Net sales

4,304

4,128

-4.1%

12,537

11,068

-11.7%

Expenditure

3,741

3,672

-1.8%

10,815

9,897

-8.5%

Operating profit (EBDITA)

563

456

-19.0%

1,722

1,171

-32.0%

EBDITA margin (%)

13.1%

11.0%

13.7%

10.6%

Other income

28

51

84.2%

76

86

13.3%

Interest (net)

(43)

(32)

(126)

(95)

Depreciation

71

72

1.4%

218

219

0.6%

Profit before tax

564

467

-17.1%

1,705

1,133

-33.5%

Exceptional Items

-

(168)

Tax

194

157

-19.1%

591.40

333

-43.6%

Profit after tax/(loss)

370

310

-16.0%

1,114

632

-43.2%

Net profit margin (%)

8.6%

7.5%

8.9%

5.7%

No. of shares (m)

52.7

52.7

52.7

52.7

Diluted earnings per share (Rs)*

15.1

Price to earnings ratio (x)**

16.8

Net profits declined by 16% YoY, lower than the operating profits mainly due to significant rise in the other income during the quarter. Moreover lower tax outgo positively impacted the bottomline. However, higher depreciation charges and fall in interest income had an adverse impact on the bottomline.

What to expect?

At the current price of Rs 255, the stock is trading at a multiple of 8.3x its estimated CY11 earnings per share. While we have estimated no growth in the topline and a 16% decline in net profits for CY09, the company reported a greater decline on both the fronts during the nine months. However, we believe that the company should be able to make up for the decline in the forthcoming quarters on the back of revival in the economy. We remain positive on the stock from a medium term perspective.

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